There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

I have written previously about title commitments and policies and surveys and the importance of the review process. Perhaps I haven’t discussed the importance of knowing who you are working with and what their abilities are.  Taking that back to the fist step, as the buyer of real estate, how do you assure that you can work with top notch title professionals.  The basic rule is that the person paying for title insurance chooses the agent and underwriter.  Because this is a cost item, and in Florida, a significant one, sometimes buyers and brokers want to negotiate the cost over to the seller.  This is a bad idea as it gives the seller control of the title process.  The seller selects the agent and the underwriter and the buyer is stuck with whatever is presented and is at a disadvantage when it comes to resolving issues.

I can tell countless horror stories about having to work with the other guy’s title company, on large deals and on small deals, going back many years. Needless to say, when my client controls title, the process and result goes much smoother (note, in Florida, attorneys may act as title agent, meaning we issue the policy for the underwriter).  I select the underwriter I feel is appropriate for the deal.  I have long relationships with examiners and underwriters and I know that the commitment I receive will be thorough and if there is a problem, we will jointly work to solve it.  It won’t be thrown back at me without a solution.

More often than not, when the other guy is in control, the opposite occurs. We find problems that the title company missed.  We run down the solutions when the title company should.  We argue with underwriters.  Product and documents are not timely delivered. Because it is not my transaction, I can’t go around the agent even if I have a relationship with the examiner.  Deals stall or even die.

Recently, my buyer client signed a contract prior to contacting where he agreed to pay for title but use the seller’s title company. This was a double no no.  The title commitment appeared clean.  The seller provided an unsigned, unsealed survey dated just 10 months prior.  However, the seller never received the final survey.  Naturally, the title company was unwilling to delete the survey exception based on this survey.  We tried to contact the surveyor to get a signed copy and update the survey, but the surveyor had gone out of business.  We therefore obtained a new survey.  The new survey showed us that there was no access to the property from a public road.  Therefore, the title was not marketable.

Presumably, the title company had based its commitment on seller’s prior policy, issued less than 1 year ago. I asked numerous times for a copy of the prior policy and for an explanation as to what the title company would require in order to insure access.  I got neither.  The agent would not allow me to speak to the underwriter.  After 3 weeks, I was finally able to speak with the underwriter from the prior title company who explained to me that the prior policy had made exception for the access issue specifically.  Therefore, the title company either never received the prior policy or ignored it.  Either way, they kept silent.

We eventually received documentation from the county enabling the title company to insure access and allowing us to close. But, the point is that the other guy’s title company did a horrible job.  It missed the access problem initially, refused to explain the problem until I figured it out from the prior title company and then wouldn’t tell us how to resolve it for another week.  They delayed the closing by a month and a half.  All this happened because I did not have control of title because the contract gave it to the other guy.

In another on-going case, the other guy’s title company has taken over 6 months to issue the final title policy.  After months of pleading and finally, threats, we received the policy.  It was wrong.  It did not even match the marked up commitment issued at closing.  The delay in issuing the final policy has delayed our client in re-financing its property.  Our new title search for the new loan policy has uncovered potential title problems that should have been resolved when we bought the property and were never shown on the title commitment.  But other guy’s title company never raised these potential issues.  If/when we get the final policy, we might have to file a claim if the new underwriter is not satisfied that the potential issues have been resolved.  I really wish the client had not negotiated away the control of the title in this case.

Whenever possible, do not negotiate the right to control title away. The cost of title insurance is a cost well spent to insure that your deal will close the way you want it to close.

    Get Blog Updates

    Get news, insights, and commentary delivered straight to your inbox!
    Click Here

    About Us

    Welcome to Assouline & Berlowe’s Florida Real Estate Law and Investment Blog with news, insights, and commentary for investors, developers, and their advisors.

    Topics

    Recent Updates

    Archives

    Stay ConnectedLinkedIn

    STAY TUNED!
    Get Blog Updates
    We'll send you an email whenever we add a new post.
    Stay Updated
    Give it a try, you can unsubscribe anytime.
    close-link
    Get news, insights, and commentary delivered straight to your inbox!
    Click Here
    close-link